The Beta of an All Equity Firm Is 1

question 47

Multiple Choice

The beta of an all equity firm is 1.2. If the firm changes its capital structure to 50% debt and 50% equity using 8% debt financing, what will be the beta of the levered firm? The beta of debt is 0.2. (Assume no taxes.)

• A) 1.2
• B) 2.2
• C) 2.4
• D) None of the above

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Definitions:

Functioning

The action of operating or working in a proper or particular way.

Resilience

The capacity to recover quickly from difficulties; toughness.

Defense Mechanisms

Psychological strategies used unconsciously by individuals to protect themselves from unpleasant thoughts or feelings.

Coping

Utilizing conscious effort to solve personal and interpersonal problems in order to manage and minimize stress and conflict.